Liberals’ ‘middle class tax cut’ is not a tax cut at all

The new Minister of Middle Class Prosperity was unable, in her first week on the job, to define the middle class with much precision or syntax. It’s “where people feel that they can afford their way of life,” Mona Fortier told CBC Radio. “They have a quality of life, and they can have, you know, send their kids to play hockey or even have different activities.”

In fairness, if the minister cannot define the file for which she pretends to have responsibility, neither can the government in which she notionally serves. Four years and two elections after they first started droning on about it, the best guess as to what the Liberals mean by “middle class” is “most people,” or more particularly, “most voters.”

Consider the latest “middle class tax cut,” promised in the platform and announced this week – a tax cut that is not a tax cut, and that applies to people who are not remotely middle class. For that matter, the basic personal exemption, which would be increased from $12,298 today to $15,000 in 2023, is not an exemption, really. It’s a credit – money you get from the government, not money you earn that the government leaves alone.

Have a look at your tax form. It’s not even called an exemption: It’s called the basic personal amount. Nor do you get to deduct it from your income, like an exemption. If you could, your tax owing would be reduced by the amount of the deduction times the top rate of tax you would otherwise have to pay on that income. Instead, policy makers saw fit to turn it into a credit, redeemable only at the 15 per cent bottom rate of tax. Basically everyone, rich or poor, gets a flat $1,884 ($12,298 times 15 per cent).

In other words, it’s a spending program, by another name. And since it applies to nearly everyone, an expensive one. Just to enrich it will cost the government another $6-billion a year, when fully implemented. It might have cost more, had the Liberals not added a wrinkle: The increase in the credit is phased out, starting at $150,473 in income; at $214,368, it disappears altogether, allowing the Liberals to say they have excluded the “richest” – the fabled 1 per cent – from its benefits.

And so they have. They’ve just included everyone short of that: the near-rich, the pretty rich, the rich, even the filthy rich, relatively speaking. Those eligible may not think of themselves that way: Virtually everyone, according to the polls, defines themselves as “middle class,” and why not when there’s money in it? But to actually be middle class, you’d have to be earning somewhere around $35,000 – the median income, according to Statistics Canada. Even if you defined middle class as, improbably, the “middle” 80 per cent of the income distribution, you’d still be earning less than $96,000.

A policy that pays out to people making as much as $214,368 may be many things, but it is not a middle-class tax cut. If the richest are excluded, moreover, so are the poorest. The credit is “non-refundable,” meaning it applies against taxes owing. If you pay no taxes, you get no credit. And if you are below the existing BPA, you gain no benefit from raising it further.

What we are left with is a $6-billion handout to just about everybody except those who need it most. And all of it is borrowed. With the deficit already in excess of $20-billion and headed higher, the government is proposing to borrow another $6-billion annually, and give much of it to people in the top half of the social register.

It’s one thing to borrow for investment – for things that pay returns into the future, enough at least to cover the extra interest costs incurred. But this isn’t for investment: it’s for consumption. You don’t have to do anything productive to benefit from the Liberal “tax cut.” You get it just for being you.

Suppose instead the money had been used to cut marginal tax rates: the rate that applies to the next dollar earned. That really would be an investment – a permanent and much-needed improvement in incentives to work and invest, at a time when labour and especially capital are in short supply, relative to the demands of an aging population.

Of course, to get much bang for your buck, you’d have to cut the top rates, since it’s those in the upper brackets who have most of the wherewithal to invest. And it’s the top rates that have reached confiscatory levels: north of 50 per cent, federal and provincial combined, in much of Canada.

Unthinkable: Tax cuts for the rich! Maybe. But it sure beats handouts to the rich, doesn’t it?

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